China Share of U.S. Imports Decline as Mexico, India, and SE Asia Gain

This op-ed originally appeared in the SCMP, May 20, 2019

China’s position as top US trade partner and largest source of American imports may be over as other economies gain from Beijing’s tariff troubles. Mexico and countries across Southeast Asia have already seen their percentage of US imports rise as China’s declines. This change will only accelerate as the trade war continues, and as of now there’s little reason to think it won’t go on for an extended period.

If US President Donald Trump raises tariffs on all Chinese imports, as he’s threatened to do, bilateral trade may never be the same.Shifting trends are already showing up in the trade data. While China continues to be a top source of US imports, sales in the first quarter of 2019 have dropped 14 per cent to US$106 billion from US$123 billion during the same three-month period last year, according to US Census data.

This is despite the US dollar strengthening against the Chinese yuan, making Chinese imports even cheaper. Mexico, the No 2 source of US imports, had the largest quarterly gains. Over the past decade, Chinese manufacturers have also lost market share in four out of its seven top US sectors, including computers, apparel, toys and furniture. Mexico’s share of the lucrative US computer segment grew to 32 per cent in 2018, from only 21 per cent in 2010. The recently negotiated US-Mexico-Canada trade agreement gives Mexican firms an even stronger advantage after Trump raised tariffs on Chinese imports.

Countries throughout Southeast Asia have also increased their market share in other top China categories. Vietnam has tripled its sales of apparel and textiles (non-wool or cotton) to nearly US$7 billion from US$2.25 billion in 2010. Taiwan, the Philippines, Thailand and Vietnam are also gaining on Chinese firms’ sales of computer accessories.

Chinese firms still account for half of all US imports of computer accessories, but other competitors are picking up significant market share. Collectively Taiwan, the Philippines, Thailand, Vietnam, and Mexico captured 28 per cent of this US import sector, up from 15 per cent at the beginning of the decade. These increases occurred despite Trump abandoning the Trans-Pacific Partnership, an agreement meant to eliminate tariffs among participating countries, which would have accelerated imports from Vietnam even faster.

India, too, is uniquely positioned to reap the benefits of shifting supply chains and its growing domestic market. According to the International Monetary Fund, India is already the fastest-growing major economy in the world and is expected to hit nearly 8 per cent in 2024, up from 7.1 per cent in 2018.

Construction has begun on the city of Amaravati, the new capital of the state of Andhra Pradesh. Photo: AFP

Construction on the city of Amaravati, the new capital of Andhra Pradesh, India. Photo: AFP

Gems have dominated exports to the US, but several Indian states, including Andhra Pradesh, in southeast India, are now home to mobile phone manufacturing plants. India’s cellphone exports to the US remain extremely small at present, but increases in capacity, rising skill levels and comparably lower wage costs that supply the booming domestic market may support export-oriented growth in the future.

India’s infrastructure projects are also expanding, providing US companies facing difficulties in China with new opportunities. Several cities are being built from the ground up, including Amaravati, the recently established capital of Andhra Pradesh. These projects feature green architecture, smart city technology, alternative energy and large-scale construction of residential and commercial buildings.

The World Economic Forum estimates that the automotive and electronics industries in the state alone could present a US$5 billion opportunity.The capital is one of several new developments in the world’s second most populous country and is emblematic of India’s economic rise as China’s own infrastructure spending comes under pressure. That’s good news for US construction equipment makers that have been caught up in China’s latest US$60 billion of retaliatory tariffs.

Difficulties, of course, litter the road to India becoming a global economic powerhouse. Fractious domestic politics, something single-party China has largely avoided, hobbled India’s potential for decades. Ports, road, rail and power currently lag more developed economies in the region. And the Trump administration has targeted India’s excessive tariffs on many US goods, opening up a possible new front in what is becoming his global war on trade.

Support for economic reform is being fostered by the US business community in India. In marked contrast, the business community in China, a long-time buffer to Washington trade hawks, have begun to sour on Beijing’s promises of change.The American Chamber of Commerce in China noted in its 2019 report that for the first time US business sentiment has turned from “cautiously optimistic” to “cautiously pessimistic”. That’s a sea change from years of rosy-viewed survey results.

Even for China’s industries of the future, carving out a sustainable portion of US imports will be difficult

For years they avoided confrontation over policies favouring Chinese domestic companies and forced technology transfer. They accepted short-term losses with the hopes of even greater profits in the future, all while dissuading the US government from more forcefully confronting China. Some now privately support Trump’s efforts to forge a more level playing field, though opposition to tariffs as the tool remains.

Domestic changes to China’s economy also make reclaiming lost market share among US imports increasingly difficult. Central planners in Beijing readily accepted that higherdomestic wages would force low-end manufacturing out of the country. Those jobs left and won’t be returning, much as they did for Japan, South Korea and Taiwan, which no longer make the vast majority of plastic toys and clothing for export.

Employees work on the production line of clothes for export at a factory in Xiayi county in China’s central Henan province in August 2018. Photo: AFP

Employees work on the production line of clothes for export at a factory in Xiayi county in China’s central Henan province in August 2018. Photo: AFP

Even for China’s industries of the future, carving out a sustainable portion of US imports will be difficult. Distrust over expansive intellectual property theft will remain a concern over Chinese hi-tech products like networking equipment, artificial intelligence and biotechnology, the principal areas targeted for future growth.

What the tariff fight now represents is a fundamental shift in the trading relationship. China’s pain is a gain for other countries eager to fill the import gap. This shift may turn into a structural change that will be extremely difficult to reverse. As threats rise from both sides of the Pacific, it may already be too late.

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China’s “Maritime Militia” Raising Stakes for South China Sea Clash

This op-ed originally appeared in the SCMP, May 10, 2019

For years China has avoided direct military-to-military clashes in the South China Sea through the use of fishing vessels backed by the Chinese Coast Guard to enforce its territorial claims. This “maritime militia” strategy may have exhausted its effectiveness now that the U.S. considers these irregular forces to be under the command of the People’s Liberation Army and Navy (PLAN). 

Photo:AP

U.S.-China military dialogues need to increase to match this rising risk of small-scale skirmishes leading to broader armed conflict. Prospects for dialogue, however are dimming as tensions across a range of bilateral issues show no signs of easing.

It was no trivial distinction when, as has been recently made public, U.S. Admiral John Richardson told Chinese Vice Admiral Shen Jinlong in January, 2019, that militia and Navy would be treated the same.

A larger-scale conflict almost occurred as recently as December, 2018, when China sent 100 maritime militia ships to contest the Philippine-occupied Thitu reef located between the island of Palawan and Vietnam. By April, 2019 the number had grown to over 200 ships. Under the new calculus if the Philippine military were attacked by any of these vessels, the treaty-bound U.S. would be obligated to strike back. U.S. Secretary of State Mike Pompeo reassured Philippine President Duterte of this commitment.

Though small in size, unarmed fishing boats, and armed Coast Guard vessels routinely approach ships in the region and ignore warnings to keep their distance. Any one of these could pose a serious threat as the 2000 bombing of the USS Cole, which resulted in the death of 17 sailors and the injury of 39, clearly illustrated. 

Without stronger and more regular contact, the threat of even simple harassment activities that have been tolerated in the past may quickly turn to armed conflict.

This change in military operational protocol comes at a time of increasingly tense relations between the U.S. and China as political forces in both countries test the strength of the status quo. U.S. President Trump’s hardline National Security Adviser John Bolton appears ascendant in the administration’s often haphazard foreign policymaking process, often leading public messaging from the White House. He’s taken aggressive stances against Venezuela, Iran, and North Korea with an excessively bellicose approach to international affairs. 

Recent racist comments from State Policy Planning Director Kiron Skinner certainly don’t help bilateral relations either. In a recent Washington speech at a security event sponsored by the centrist New America think tank, she stated that the challenge posed by China is one of a different ethnicity and civilization and a “non-caucasian” great power competitor. 

With this type of xenophobic theorizing posturing as serious policy, more contact and strong lines of communication between the U.S. and China are more important than ever.

Chinese aggression is also on the rise as naval forces have continued to strengthen. A “near miss” occurred as recently as September, 2018 when a Chinese warship deliberately came within 45 yards of the U.S. warship Decatur, forcing the ship to alter course and avoid a serious collision.

Mediating these conflicts used to be the domain of military-to-military contacts at the highest levels of government. Formal dialogues were regularly held under both Republican and Democratic administrations.  The peaceful resolution of a 2001 mid-air collision between a Chinese jet and a U.S. P-3 surveillance plane, which resulted in the death of a Chinese pilot and the emergency landing of the U.S. crew on Hainan, provides ample evidence of the value of continued communication.

Without stronger and more regular contact, the threat of even simple harassment activities that have been tolerated in the past may quickly turn to armed conflict. As history shows, what starts out small and contained can quickly escalate in ways neither country can easily control. 

Facts at sea are not going to change anytime soon. The U.S., as well as other countries, will continue Freedom of Navigation Operations in the South China Sea in areas globally recognized as international waters. 

Image: Central Intelligence Agency – Asia Maps — Perry-Castañeda Map Collection: South China Sea (Islands) 1988

China is strengthening its artificial islands and their naval harbors, airstrips, and radar installations even though Xi Jinping specifically said he would not militarize the South China Sea back in 2015. 

International and regional responses to these provocations have been exceptionally muted.

Despite a 2016 ruling by a UN tribunal, which declared these installations illegitimate, China has continued to build, occupy, and arm its South China Sea outposts. The UN Convention on the Law of the Sea, to which China is a signatory, makes clear that artificially constructed islands cannot be used as justification for territorial claims. 

The ASEAN Regional Forum (ARF), comprised of 27 nations, has been unable to address concerns over China’s conduct in the South China Sea. An ARF member, China routinely blocks attempts to address these issues.

Which leaves bilateral relations as the main driver of discourse. 

As China’s ambitions expand economically and politically around the globe, its military reach will inevitably grow as well. The build-up, including several aircraft carriers and plans for several more, as well as advanced submarines speak to ambitions that go far beyond China’s coast. 

Without an effective and regular mechanism for two of the world’s largest military powers to address their issues in a peaceful manner, the greater the risk of conflict. Neither country should let this situation devolve further. There’s already too much at stake in a relationship that grows more tense with time.

Trump’s Limited Options on Venezuela

A version of this op-ed first appeared in the SCMP on 4/22/19. Since publication an uprising led by opposition leader Guaidó against Maduro’s rule began..

Opposition leader Guaidó rallying against Maduro.
Credit: Carlos Garcia Rawlins/Reuters

The U.S. announced enhanced sanctions against Venezuela in April targeting the Bank of Venezuela, cutting off its access to the U.S. financial system. The move, intended to further isolate Nicolás Maduro’s regime, comes after months of tough talk to end his grip on power. More sanctions are expected in May to further curtail Venezuela’s trade in oil, their main export and foreign currency earner.  

President Trump and his National Security Adviser John Bolton have continued to call for Maduro’s ouster, repeatedly saying that “all options” are on the table. While grandstanding for adoring crowds may be Trump’s specialty, Maduro’s generals and allies have not been moved by the threat of armed conflict, especially Russia and China, who continue to back him despite the increasing risk of defaults on tens of billions of dollars in loans.

Trump has very limited, if any, “hard” military options due to both conditions on the ground and domestic and international political constraints. Invasion, blockade, or arming an alternate military force of defectors are extremely unlikely. If the administration is truly interested in supporting Venezuelan democracy, they are going to have to abandon their go-it-alone strategy and build strong alliances to assist in ending Maduro’s destructive rule. That means toning down the war-like rhetoric.

In a reversal of goodwill shown for decades, perceptions of the U.S. among countries around the world have plummeted during Trump’s tumultuous presidency. According to a February, 2019 Pew Research Center report, forty-five percent of nations surveyed regard U.S. power and influence as a “major threat.” The highest percentages, and largest changes in negative sentiment, came from Germany, France, Mexico, and Brazil. 

Trump also targeted major trading partners and allies with unilateral tariffs including Canada, Mexico, the EU, and Japan. Most recently he’s rescinded aid to Honduras, Guatemala, and El Salvador over illegal immigration concerns. For the past two and a half years the White House has done nothing but excoriate Latin America on immigration issues. That’s done little to endear the region to U.S. concerns about democracy in Venezuela.

Photo credit: Reuters

Any military intervention is complicated by Russia reportedly sending troops and material to help prop up Maduro’s failing government. While their numbers may be small compared to the U.S. Southern Command, their presence hampers potential military options with the threat of direct U.S. – Russian conflict in Latin America.

Trump has very limited, if any, “hard” military options due to both conditions on the ground and domestic and international political constraints.

In addition, there’s been little sign that Maduro’s generals will defect. Hopes rose when Air Force General Francisco Yanez switched his support this past February to Juan Guaidó, the main opposition leader.

Since then there’s been limited signs of military support for the opposition save for rank and file soldiers complaining about harsh economic conditions. Along with Maduro’s political elites, top members of the armed forces remain one of the greatest beneficiaries of government largesse while the rest of the population struggles to survive. Cuba is reportedly assisting Maduro as an additional military wing to keep his troops in line.

Even in the U.S. there’s questionable support for military intervention after decades of conflict in Afghanistan and Iraq. Trump’s “America First” rhetoric is founded on unwinding U.S. involvement overseas, not starting new ones. With the U.S. presidential election cycle about to kick off in earnest, Trump will be preoccupied with campaigning. A controversial military conflict unpopular with his isolationist base would likely drag on his re-election efforts.

While the U.S. has targeted Venezuela’s oil exports, its main source of revenue, the campaign has met with limited success. State-run Venezuelan oil company Petróleos de Venezuela (PDVSA) continues to export almost one million barrels per day, with most going to China, Russia, and via Singapore to other destinations.

China, which lent heavily to Venezuela with oil-backed loans starting in 2007, is still due an estimated $20 billion. If sanctions curtail oil production, those loans are at increasing risk of default.

The next round of sanctions are expected to target companies and financial institutions involved in the oil trade, cutting them off from the U.S. banking system. That’s significant leverage on Venezuela’s sales of oil. Some countries, including Russia, are willing to barter refined fuel for the oil, subverting the global financial system. There’s little to stop that trade from continuing.

Still, a further tightening of Venezuela’s access to hard currency will have some effect on the economy, but will it be enough to turn the political tide? In principle the lack of cash should weaken Maduro’s ability to pay his generals, fomenting unrest and eventually leading to defections. That hasn’t worked so well against North Korea. Largely cut off from the international system, the Kim regime is still able to import luxury goods and supply its expanding missile and nuclear arsenal. 

On the diplomatic front, fifty-four countries now recognize Juan Guaidó as the legitimate President of Venezuela, after an election widely considered illegitimate by western countries. Russia, China, Iran, Syria, and Cuba continue to back him.

While the U.S. has tried to engage UN support for new elections, allies including France, the UK, and Germany objected to including security concerns in the resolution. Russian and Chinese vetoes, as permanent members of the Security Council, killed the proposal.

Despite the limited external political support for Maduro’s ouster he still holds on to power. Riots over food, electrical outages, and shortages of medicine along with an inflation rate of over one million percent that forced millions to flee the country, have not been enough to end his reign. The UN expects 5.3 million Venezuelans displaced by the end of 2019, nearly one-fifth of the population.

Which leaves the Trump administration with few options. 

If the White House wants democracy restored, then threats about military action, which alienate allies, don’t serve that purpose well. Rather, a focus on brightening Venezuela’s future and curbing the plundering of the country’s resources might bring an end to the suffering sooner rather than later.

How the U.S. Still Loses with a China Trade Deal

This op-ed originally appeared in the SCMP as “What the US will lose in a trade agreement with China,” SCMP 4/10/19

As the US and China get closer to a possible trade deal, the World Trade Organisation is set to lose its principal role as an arbiter of disputes. That has significant consequences for global trade, and underlined the re-emergence of bilateral agreements that once hindered global trade and development for decades. 

Illustration: Craig Stephens via SCMP

It’s no surprise that US President Donald Trump’s go-it-alone strategy to upend the status quo runs straight through Geneva. As a presidential candidate, he ran on rebellion. Once in office, he wasted no time reversing US participation in a variety of multilateral agreements.

He withdrew from the Trans Pacific Partnership (TPP), which the US had taken a leadership role in negotiating, and offered nothing to replace it. He imposed tariffs on much of the industrialised world, including allies Japan and the European Union, rather than bringing these disputes to the WTO. He also refused to nominate judges to the vitally important WTO Appellate Body, which inhibits the organisation from adjudicating cases.

His base probably didn’t care about these intricacies of international trade. Their economic anxieties could be assuaged, at least temporarily, by blaming foreigners in faraway places for taking their jobs.

This vision of world trade, fought as a zero-sum competition, is both troubling and naive.

In ordinary times, a dispute over market access or unfair trading practices would work its way through the international legal system. As litigants know, this can be a lengthy process. Even if the claims against a country turn out to be true, the appeals process can drag on while companies remain disadvantaged. Eventual penalties or other remedies may never fully compensate them for losses while other barriers to trade crop up in the meantime.

Instead, Trump unilaterally raised tariffs until China was compelled to negotiate directly with the US. If talks succeed, they will have made much swifter progress than a WTO case. The agreement is even reported to have an enforcement mechanism, whereby China’s adherence to its commitments will be judged under threat of reimposing tariffs. This way, the US retains direct leverage whenever the administration believes there’s been a breach of the agreement.

This all sounds perfectly reasonable – leverage the massive size of the US economy with its main trading partners to secure the best possible deal, all within a relatively short time frame. The world, it turns out, isn’t so simplistic.

A major point of contention for US negotiators is the trade deficit with China. Their solution reportedly includes Chinese government purchases of more US goods, a decidedly non-free-market solution. This fix can be easily reversed by the Chinese government in the future or delayed for any number of reasons – the domestic market may not be able to absorb those purchases, US suppliers may not be able to keep up with the demand, there may disputes over the prices set and the market distorting effects of “forced” purchasing.

Beijing is also no stranger to restricting purchases of imports for political purposes. Norwegian salmon imports were effectively barred from China for several years because Beijing disagreed with the Nobel Peace Prize award for jailed political dissident Liu Xiaobo. Restrictions and other non-tariff barriers to trade were also imposed on the Philippines for its territorial claims in the South China Sea.

Whatever the Trump administration negotiates with China will not be a durable solution, but rather a short-term political fix aimed at shoring up votes for the 2020 presidential election. Joining with similarly aggrieved WTO members to confront China could have created stronger, more lasting institutional-level change.

The negative impacts of this unilateralism are already being felt both domestically and abroad. US companies are losing out to their Canadian and Australian competitors in the lucrative Japanese market after the US withdrew from the TPP. Other countries such as Italy are turning to China’s “Belt and Road Initiative” instead of more traditional development lending institutions like the World Bank, with its extensive oversight mechanisms. That puts further strain on the legitimacy of the international system.

And that’s the point of Trump administration policies that promote a world where economic might makes right.

A fundamental principle of creating global rules of the road since 1947 was to make trade a win-win endeavour. Countries grew together as the overall size of their economies increased, in part due to the benefits of exports, which created new jobs. A rise in imports also increased competition and brought down prices. The current US administration downplays all of these advantages and instead focuses on the negatives of trade, purveying often false and misleading anecdotes of the damage open economies have on US workers.

Without doubt, China has been gaming the system for decades, alternately declaring itself a developing country that needs protection and a global economic powerhouse that deserves the respect of the world. It can’t be both. Entrance into the WTO gave China privileges as well as responsibilities.

As long as China’s market continued to grow, many advanced economies chose to ignore the heavily-tilted playing field. Only now when growth is slowing, the political environment is hardening and the government is actively supporting domestic companies, have the US, Europe and others decided to take action.

Trump’s tariffs have certainly been effective at getting China to the table. They have also been the wrong tool for the right problem. In the end, they will lead to short-term, ill-conceived solutions for temporary gains. Other countries will have to resort to similar bilateral negotiations as the WTO becomes weaker. That’s a terrible precedent to set. The world’s problems are becoming increasingly complex, requiring more cooperation, not less.

If this trend isn’t reversed and soon, there may be far more at stake than just the sale of soybeans and steel. US businesses, workers and consumers will have to live with the consequences long after Trump leaves the White House.


After Hanoi – Trump Can Still Engage North Korea

(Latest opinion in the South China Morning Post 4/27/19)

Trump and Kim Jong Un meet in Hanoi. Photo:AP

US President Donald Trump had been uncharacteristically quiet since his failed meeting with North Korea’s Kim Jong-un in Hanoi. That silence ended with a confused tweet at the end of last week overturning some unannounced, but apparently new, sanctions his Treasury Department was about to impose on Kim’s government.

The Treasury had announced new sanctions for several Chinese firms helping North Korea smuggle oil and coal, among other illicit activity. The White House assured us that reversing sanctions no one knew about was an olive branch because Trump still “likes” Kim.

While that’s a downgrade from the effusive love Trump professed earlier, it seems that he still wants to keep the door open for a possible resumption of talks.

Kim had also showed some restraint, at least at first. The official state newspaper, Rodung Sinmun, kept their rhetoric on simmer after the summit, blaming National Security Adviser John Bolton and Secretary of State Mike Pompeo for the failure, rather than Trump himself.

But there’s not much left to talk about on denuclearisation. If the goodwill expressed by both sides is going to lead anywhere, there needs to be something new, like normalising relations between the US and North Korea.


Full article continues on the South China Morning Post

White House Eagerness for a Deal Gives North Korea the Upper Hand


IN A MINUTE | Trump Loses Edge with North Korea

Agreeing to meet without deal gives Kim the advantage


Trump claimed in last weeks’s State of the Union address that if it weren’t for him, the U.S. would be at war right now with North Korea. His self-praise for merely engaging the North telegraphed an eagerness for a deal that will be hard to justify should talks not deliver full and irreversible North Korean denuclearization.

Many now argue that North Korea will never give up their weapons and the U.S. should just accept that and move on, but the stakes are high for U.S. allies South Korea and Japan, the most susceptible to a North Korean provocation. If North Korea keeps its nuclear capability, Japan, a U.S. treaty ally, will certainly move to counter that threat, triggering a regional arms race.

There’s been precious little indication that Kim is willing to give up anything for another meeting with the U.S. President, a completely predictable outcome when Trump showed so much eagerness to meet in Singapore without a major breakthrough in talks.

A presidential meeting should only come after an agreement has been reached, not the other way around.

During the lapse in diplomacy since last summer’s Singapore summit, North Korea has been expanding its weapons program, not decreasing it. Recent reports and commercial satellite imagery show that the DPRK not only continued to build missiles, but there have far more weapon sites than previously disclosed. 

While North Korea has not overtly tested a missile or engine system since talks began, even the most novice global affairs observer knows delays are not concessions. Kim can fire up a test whenever and wherever he wants. Blowing up wooden sheds and exploding a mountain entrance were, at best, window dressing.

Trump has been far more adept in his trade negotiations with China and refused to meet with Xi Jinping until more details are ironed out. U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin are headed to China soon.

By refusing to say he’ll meet with Xi until he finds out what happens in the latest round of negotiations he maintains his advantage. A presidential meeting should only come after an agreement has been reached, not the other way around.

Which begs the question, why did Trump commit to meeting Kim before his Special Envoy, Stephen Biegun, finished negotiating any of the numerous and contentious details? After Biegun returned from Pyongyang Trump officially announced his Feb. 27-28 visit to Hanoi, but preparations were already underway for that visit. One can only surmise that Kim understood he had the advantage.

Up for grabs are a litany of economic, political, and military gives including the minimal lifting of some U.S. sanctions, a declaration to formally end the Korea conflict, establishing an interest section or Embassy in Pyongyang, and at the extreme, a reduction in U.S. troops and/or weapons systems on the peninsula.

Additionally Trump has already said he wants a Nobel Peace Prize for his efforts, but his vanity should not drive what may amount to a bad deal.

For any of these U.S. concessions, Trump must insist on full, verifiable denuclearization. Otherwise the bait-and-switch game will just go on while North Korea continues to build its arsenal. Transparency has always been the problem, and so far Kim has shown no more propensity to open his reclusive nation than his father or grandfather before him.

That may change if Kim is more interested in massive personal wealth and global recognition that followed Chinese and Vietnamese reform and opening. If so, Trump must press hard on eliminating the North’s ability to make and weaponize fissile material.

The worst thing that could happen in a real estate deal gone bad is bankruptcy. But an impulsive approach to high-stakes diplomacy with North Korea could mean risking regional and U.S. national security.


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“Brand America” Falls Out of Favor With Foreign Investment

Trump understands that brand matters, and the latest version of brand America is failing badly. At this year’s World Economic Forum in Davos, business executives expressed not only concern, but outright dismay, over the investment climate in the U.S. And they aren’t just sitting on their capital waiting for better days.

Investors are voting with their money and heading for other countries. The statistics for Foreign Direct Investment in the U.S. (FDIUS) show a troubling trend. In the second quarter of last year FDI turned negative, a reversal of fortune not seen in years. That followed a drop of 41% year-on-year to $277 Billon in 2017, after peaking at nearly $472 billion 2016, according to U.S. government data.

Cyclical Decline in Foreign Direct Investment to the U.S.

Companies including Tesla, Unilever, and Foxconn are looking elsewhere to invest due in part to the uncertainty around the U.S.-China trade war. Imports and exports have been hit along with supply chain disruptions. While the upcoming trade talks in Washington were bathed in a positive light from governments on both sides of the Pacific, the outcome has been thrown into serious doubt after the Department of Justice announced criminal charges against Huawei and its CFO Meng Wanzhou. 

She is currently detained in Canada on an extradition request that is now sure to move forward. Trump has said he may intervene in her case if it serves the trade talks and U.S. national security. What he can actually do, politically or legally, remains unclear.

Trump Has Few Options
on Huawei Sanctions Trouble


The souring on brand America isn’t just about China trade disruptions. Trump’s immigration policies, his tacit acceptance of jingoistic and racist dog whistling by his most ardent supporters, and the perception that the U.S. is retreating from global affairs is turning away international students that might otherwise invest in a coveted U.S. education.

Enrollment in undergraduate programs dropped for the second year in a row with a 6.6% fall for 2017-2018. That’s putting new strains on colleges and universities that have grown accustomed to full-tuition paying foreign students.

The longer term cost to the U.S. will show up in worker shortages, primarily in science, technology, engineering, and math disciplines. These professions are already woefully short on trained graduates and unfilled jobs create a drag on economic growth.

While the administration touted $1.5 trillion dollars in corporate tax reductions that began in 2018, a survey by the National Association of Business Economics shows that companies are not in fact spending more. Trickle-down economics didn’t work under Reagan and it certainly isn’t working now even with a new, slick cover promising to make America great again.

A brand is only as good as what it delivers and so far Trump’s promises made continue to be promises broken. The U.S. accumulated a lot of good will over the decades. That hard-earned reputation is now at risk of being destroyed in only a few years.


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Conflicting Signals: USTR Ups Pressure on China and Treasury Talks Lifting Tariffs

Messaging is everything in international diplomacy, especially around high-level negotiations. After the latest round of U.S.-China trade talks in Beijing, all signs pointed to a successful outcome. An extra day was added beyond the planned two days of talks. Vice Premier Liu He made a short appearance at the lower-lower-level gathering of deputies. The U.S. Deputy Agriculture Secretary had glowing words after the meeting (though curiously no one from USTR spoke during the coveted press briefing.) Trump even tweeted shortly afterwards that the talks had gone very well.

And then the messaging changed, at least from USTR. 

Lighthizer said last week, according to Sen. Grassley who had met with him Friday, that he hadn’t seen the structural changes he was looking for from China. That’s a major sticking point for the White House and something Trump has repeatedly said must be addressed to avoid raising tariffs from 10% to 25% on Chinese goods.

It is an odd complaint since China would likely only agree to the far more difficult issues face-to-face at Cabinet-level negotiations with either USTR Lighthizer or President Trump. The Beijing meeting was a the Deputy level, a.k.a. not the decision makers.

Lighthizer also announced that if talks don’t work out, U.S. companies could apply for exclusions to the 25% tariffs on $200 billion of imports from China that are set to take affect in March.

That’s a weak nod to the U.S. business community who were directly affected by the 10% tariffs and are likely lobbying hard for a resolution to the trade impasse. The promise of exclusions provide cold comfort since the aim of the next round of tariffs is to put even more pressure on China. Any exclusions would weaken that influence. Approvals would likely be slow-rolled by the administration. 

USTR now appears to be trying to get out in front and push their hardline agenda ahead of the Jan. 30-31 talks. Sen. Grassley commented in a briefing to the press that since China’s economy is ailing there’s a chance to get more progress on these harder issues, which include IP protection, forced tech transfer, and stealing trade secrets.

These issues aren’t going away. The Department of Justice is now looking into whether Huawei stole robotic technology from T-Mobile.

To further complicate the administration’s signaling, Treasury Secretary Mnuchin has been discussing lifting tariffs as an incentive for China to make an equally bold move, though it’s unclear what that could be considering the depth of structural changes needed to satisfy U.S. concerns.

Since China isn’t going to agree to the U.S. list of over one hundred issues raised, and Trump isn’t going to accept some token purchases of U.S. goods and nothing else, some kind of compromise is necessary. What Grassley and other White House hardliners may not fully accept is that Trump’s approval ratings are plummeting, major U.S. companies are feeling the effects of the tariffs, and Trump himself may be itching for a settlement.

Compromise isn’t really in Trump’s winner-take-all approach and his impulsiveness can lead to unexpected outcomes (e.g. the Wall shutdown). The U.S. and China have been locked in a mutually reinforcing death spiral of tariff-raising for the past year and time is on no one’s side here.

USTR should certainly push for everything they can get. If cooler heads prevail, some sort of short-term relief with continued tariffs on some Chinese goods, and a plan to tackle the harder issues over time is the most likely outcome.

Both sides might not get exactly what they what, but it’s certainly better than the global economic carnage of a prolonged trade war and Trump really looks like he could use a win right now.


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Deal or No Deal in U.S.-China Trade Talks

U.S. negotiators are heading back after an extended trade negotiation with their Chinese counterparts in Beijing. While there’s been no formal agreement yet, both sides are expected to make public announcements on Thursday. If talks had gone badly something would have come out in the official Chinese state-run press by now, so all signs point to some kind of deal. Will it, however solve any of the more difficult challenges in the relationship?

Trump wants to see markets rebound. Chasing the sugar high of a stock jump is hardly a trade policy, and a terrible negotiating position. This essentially gave China added negotiating leverage knowing he is eager to settle. That doesn’t bode well for any substantial movement on the most difficult issues facing U.S. exporters — forced tech transfer, non-tariff barriers, and intellectual property theft. That was the whole reason Trump launched his ill-thought out trade war in the first place by ratcheting up tariffs on Chinese goods.

If there’s no movement on those hard issues, what was the point? China announced they’re going to be buying U.S. soybeans again, but China was already buying U.S. soybeans before Trump’s tariffs. That’s not a concession. 

China also announced that U.S. rice would be allowed into their market. While this is new, market access isn’t likely to dent the trade deficit as U.S. rice prices are significantly higher than other suppliers to China, most notable from Southeast Asia.

Other Chinese government moves included reduction in auto-tariffs, already offered to the rest of the world. While some legal reforms have been mentioned, enhancing IPR protection for example, changes in law are often not fully implemented. Given the inherently political nature of China’s judicial system, companies have little recourse.

These “structural” reforms tend to be the most difficult, often edging too close to issues that party hardliners in Beijing hold dear (e.g. favorable government and financial support to state-owned enterprises.) They’ll most likely kick the can down the road like they have for years and wait out what’s left of the Trump presidency.

That’s the crux of these negotiations. Are Chinese officials convinced that Trump will hold his line or will he cave to his own domestic economic pressures? It’s looking like Trump’s eagerness for a win will trump his own hardliners who are pushing for China to fundamentally change the way they do business. While that’s a laudable goal, they’ve used the wrong tool for this kind of heavy lifting.

Adding to the uncertainty, no senior-level negotiator was present for the talks. This was more of a working level negotiation and all of the familiar figures in Washington need to give their input including U.S. Trade Representative Lighthizer, Treasury Sec. Mnuchin, and Advisers Navarro and Kudlow. Interestingly it was mainly the Agriculture Deputy Secretary who spoke to the press, not the USTR Deputy Secretary, who ostensibly led the negotiations.

So what did Trump get out of all this turmoil? Hard to say until tomorrow, and there’s still three weeks to the March deadline, but there will be plenty of spin about the great, great, concessions that no U.S. president has ever gotten from China before. 

Expect an announcement highlighting all the U.S. goods China is going buy as a result. For comparison, from Jan. to Oct. 2018 China bought $102.5 billion in U.S. goods. Over the same period in 2017 the number was $104.5 billion (U.S. Census data for 2018 is currently available through Oct.) If the structural issues aren’t resolved, don’t expect too much difference in overall U.S. exports, especially as China’s economy slows down.

Markets react quickly to news, and then adjust to facts. Trump might still get his temporary stock bump, but a sugar high never lasts. China is playing the long game and a fickle market movement is about as small a win as it gets. 


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Trump Has Few Options on Huawei Sanctions Trouble

Time is running out on the U.S. extradition request for Huawei’s CFO, Meng Wanzhong who was arrested in Canada in December. This follows an investigation on sanctions-busting by the firm related to business ties with Iran. Trump said that he might intervene in the case if it helped with the China trade impasse and for national security reasons.  As much as he’d like to use the Huawei case for political purposes he actually has few options. 

Intervening creates a dangerous linkage between national security issues and trade politics. China routinely engages in this type of politicization, and is part and parcel of their attempts to influence other countries over a variety of perceived slights. In 2017 South Korea’s Lotte department store chain shut its China operations after a concerted government effort to thwart their business (stores were suddenly hit with fire hazard violations,) when the firm gave up land to the South Korean government for a U.S. THAAD missile defense system installation. In 2011 the Chinese gov’t banned Norwegian salmon after the Nobel Prize was awarded to Liu Xiabo, a Chinese dissident who later died while in custody.

State Department Issues China Travel Warning for Americans

The U.S. is not China, and a Trump intervention would signal that the rule of law is no longer the rule of the land. The political backlash from left, right, and what remains of the center would be swift and significant.

Political intervention would make Trump look weak on China, again. Trump already gave Xi Jinping a huge gift when he lifted a ban on ZTE after its own Iran sanctions trouble. The company would have gone out of business without that commercial “pardon” to continue purchasing U.S. technology. Xi Jinping did not return the favor and blocked Qualcomm’s $44 billion purchase of NXP. China was the only country standing in the way. 

Canda Warns U.S. Not to Politicize Extradition Case (Reuters)

That’s not to say Trump won’t try, but a criminal case is harder to interfere with than the ZTE sanctions case. Politically, Democrats have the majority in the House and will hit from the left. Hardline Republicans, who want a more forceful policy on China, will strike from the right. And any meddling in the Department of Justice while Mueller’s investigations remain open would be a huge red flag for those considering impeachment hearings.

The only option is to let the legal system run its course. While this may inflame tensions with China in the short term, it reduces the chances of a U.S. political backlash.

Don’t be surprised though if Trump surprises us all and defies the collective wisdom with an impulsive response if Canada agrees with the extradition request. While he has the power to free Huawei’s CFO, promising more than he can deliver ahead of time may prove that a Trump promise made, is a promise easily broken. That would significantly weaken his trade negotiating position vis-a-vis China.


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